Tax Reduction Strategy: Taylor Big Savings on Taxes with Non-Grantor Trusts via the New SALT Cap Deduction
News Article: Maximizing Tax Savings with Non-Grantor Trusts under the Enhanced SALT Deduction
The One Big Beautiful Bill Act (OBBBA) has reinstated a provision that significantly increases the state and local tax (SALT) deduction cap for tax years 2025 through 2029, offering substantial tax and estate planning opportunities, particularly for residents of high-tax states.
Under the new law, the SALT deduction cap is raised from $10,000 to $40,000 in 2025, with annual increases thereafter. This higher cap may make itemizing deductions more attractive than taking the standard deduction for taxpayers with significant state and local tax liabilities.
One key strategy for utilizing non-grantor trusts in tax and estate planning under the increased SALT deduction cap focuses on leveraging the separate taxable entity status of these trusts to maximize state and local tax deductions, especially in high-tax states.
Establish Multiple Non-Grantor Trusts
Since non-grantor trusts are treated as separate taxable entities, each trust can claim its own SALT deduction of up to $40,000 (for 2025), provided the trust's adjusted gross income (AGI) does not exceed $500,000. By splitting income-producing assets into multiple trusts, taxpayers can multiply the SALT deduction beyond the previous $10,000 cap that applied to individuals.
Transfer Income-Producing Assets to Trusts
Shifting assets such as rental properties, business interests, or investment portfolios to these trusts enables the generation of multiple streams of income, each potentially staying under the AGI threshold, so each trust can claim the full SALT deduction.
Manage Trust Income Distributions
Trustees can consider distributing less income to beneficiaries to enable the trust itself to take maximum advantage of the SALT deduction. For existing trusts, strategic income retention can optimize tax savings within the trust rather than passing income to beneficiaries who face their own caps.
Flexibility to Convert to Grantor Trusts Post-2030
Because the increased $40,000 SALT cap applies only temporarily (2025–2029), estate planners should build in flexibility so trusts can convert back to grantor status after the higher deduction expires in 2030. Grantor trusts offer planning advantages such as asset swapping and loans without income recognition, which remain valuable beyond SALT deduction benefits.
Consider Pass-Through Entity Taxation (PTET) as Complementary Strategy
Some states have or may implement PTET regimes allowing pass-through entities (LLCs, partnerships, S corps) to pay state income tax at the entity level, which is deductible without SALT cap restrictions. Coordinating PTET approaches alongside non-grantor trusts may amplify state tax savings for high earners.
"Trust Stacking" Strategy
Creating multiple trusts ("stacking") leverages each trust’s separate taxpayer status and SALT deduction allowance. This is particularly potent in high-tax states to multiply deductions on multiple asset streams, reducing overall state and local tax burden.
These strategies collectively allow taxpayers in high-tax states to maximize state and local tax deductions by exploiting the non-grantor trusts' separate tax entity status under the OBBBA's enhanced SALT cap provisions while preserving estate planning flexibility for the future.
However, it's essential to note that each trust's AGI must be carefully monitored to ensure it stays below $500,000 to maintain the full SALT deduction. Additionally, the IRS may closely examine strategies involving multiple trusts to ensure they are not solely tax-avoidance schemes, requiring trusts to have a legitimate purpose and economic substance.
In conclusion, the increased SALT cap offers a valuable opportunity for taxpayers in high-tax jurisdictions, such as California, New York, New Jersey, and states with high property taxes, to optimize their tax strategies and reduce their overall tax burden.
The strategies revolve around leveraging non-grantor trusts in the context of business and finance, allowing taxpayers to invest assets like rental properties, business interests, or investment portfolios, thereby generating multiple income streams that can maximize state and local tax deductions, especially in high-tax states.
In the light of the new law, taxpayers are advised to establish multiple non-grantor trusts to claim multiple SALT deductions, each of up to $40,000, by splitting income-producing assets and managing trust income distributions strategically.
